What are Inverted Hammer Candlesticks?
It is a reversal candlestick pattern with long upper shadow and no lower wick. It is a simple candlestick pattern made of a single candleline. They are bullish in nature and appear at the end of a down trend.
It has its name because of its resemblance to the hammer which is placed upside down. It may also mean that the market is getting ready to hammer the prices from below up.
A Hammer candlestick which is inverted typically appear at the end of a down trend. They have a small real body at the lower end of the candle. The body may be black or white. They have a long upper wick which is double the height of the real body. The lower wick may be absent or very short.
It is formed because of the bulls not allowing the bears to push the price down. The stock is in a down trend and at a crucial support level. After opening, the buyers push the prices up by creating demand. Intraday traders who are also in the mood of bullishness, add to the demand.
But later in that time period the sellers increase in number thinking that the prices have pulled back due to a correction in a down trend and the supply for the stock increases. As it reaches a crucial level level the bulls accumulate stocks using this selling frenzy.
Any amount of selling is neutralized by equally increased buying at the lower level. As the demand increases more than the supply the price stops falling further and closes near the opening, either just below or just above the opening price.
This results in a small body and a long upper shadow, which is double the height of the real body, with no or a very small lower shadow, which looks like a Inverted Hammer.
Study the chart given below.
Inverted Hammer is a minor bullish reversal pattern.
The market opens and continue its down trend in the direction of ongoing trend. At the lower end of the trend the buying from smart money starts. The trend reverses and the demand increases pushing the price higher.
The presence of support, lack of bearish black candle with a close below the support, presence of small body - all signify the action of bulls. There is fresh buying by bulls as well as short covering by bears.
This should hint us the cessation of the down trend. Uptrend is likely to start.
While every one is pessimistic about the bear phase, you should feel cautious about the bulls activity not allowing the price to fall below the support area.
Next day's price movement confirms whether the trend is reversed or continuing. The confirmation may be in the form of a long white candle with a gap up real body. You should cover your short position and may plan to create a long position.
Inverted Hammer candle with a white body is more bullish than the one with a black body.
Inverted Hammer alone is not an indication to go long. One should always wait for the following confirmation bullish white candle. Then go long above the high of this candlestick.
Candlesticks with similar features, when they appear at the end of an up trend are called as Shooting Star candlesticks which are bearish in nature. So the name changes depending on, whether they appear at the end of an up trend or a down trend.
Read about it by clicking on the link below.
There are many more simple candlestick patterns used in stock analysis. Some of them are listed below. You may click on the name of each pattern listed bearish to learn and understand more about them.